TaxTMI 
TaxTMI 
2026 (5) TMI 1062
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....income for Assessment Year 2013-14 declaring loss of Rs. 1,00,17,52,143/- under the normal provisions of the Income-tax Act, 1961 ("the Act") and book profit of Rs. 56,46,07,739/- under section 115JB of the Act. Subsequently, the assessee filed a revised return declaring the same loss under the normal provisions and revised book profit of Rs. 56,70,83,299/- under section 115JB. The case was selected for scrutiny assessment and during the course of assessment proceedings, the Assessing Officer and Transfer Pricing Officer examined various international transactions entered into by the assessee with its Associated Enterprises as well as claims of expenditure / deductions under the normal provisions and MAT provisions of the Act. The Assessing Officer completed the assessment assessing total income at Rs. 27,25,55,577/- as against the returned loss after making transfer pricing adjustments and tax disallowances. 3. One of the major issues examined during the transfer pricing proceedings related to adjustment of Rs. 74,02,428/- on account of corporate guarantee extended by the assessee in favour of its overseas Associated Enterprise, namely Satellite Overseas Holdings Ltd., UK. The ....
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....related parties including Casil Health Products Ltd., Casil Industries Ltd., Karnavati Engineering Ltd., Omnicare Pharmaceuticals Ltd. and IRM Enterprises Pvt. Ltd. According to the Assessing Officer, the assessee had paid substantial interest on borrowed funds while simultaneously advancing interest-free loans to group entities and therefore proportionate interest expenditure attributable to such diversion was liable to be disallowed. The Assessing Officer computed the disallowance by applying interest rate of 9.5% on the supposed interest-free advances. During appellate proceedings before CIT(Appeals), the assessee furnished explanation regarding the commercial expediency and business nexus of the advances. The assessee submitted that the advances were intrinsically connected with business operations and were extended in ordinary course of commercial dealings for purposes such as job work arrangements, purchase transactions, operational support, recovery facilitation and strategic business requirements. The assessee also contended that substantial own funds and reserves were available and therefore presumption ought to be drawn that advances had been made out of non-interest-bear....
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.... claim of Rs. 3,06,35,101/- was concerned, the CIT(Appeals) did not grant further relief and the additional claim remained unallowed. 6. The Assessing Officer had also disallowed expenditure incurred on product registration by treating the same as capital expenditure not allowable under section 37(1) of the Act. The assessee had incurred substantial expenditure towards obtaining registration approvals for pharmaceutical products in various overseas jurisdictions to facilitate export and marketing of medicines in foreign countries. According to the Assessing Officer, such expenditure resulted in enduring benefit and therefore assumed the character of capital expenditure. The assessee, however, contended before the Ld. CIT(A) that product registration expenses constituted recurring business expenditure incurred in ordinary course of pharmaceutical business operations and no independent capital asset came into existence as a result of such expenditure. The assessee submitted that pharmaceutical companies are required to continuously incur registration and renewal expenses for maintaining regulatory approvals in different jurisdictions and therefore the expenditure merely facilitate....
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....uctuation loss of Rs. 45.24 crores by treating the same as speculative loss under section 43(5) of the Act. According to the Assessing Officer, the foreign currency derivative contracts entered into by the assessee were speculative transactions not directly connected with ordinary business operations. The assessee submitted before the CIT(Appeals) that the foreign exchange losses had arisen from genuine hedging transactions entered into for safeguarding export-import business and foreign currency exposures arising in regular course of pharmaceutical business activities. The assessee submitted that the derivative contracts were integrally connected with business operations and were entered into solely for risk mitigation purposes. The assessee further relied upon judicial precedents including earlier decisions in its own case wherein similar foreign exchange losses had been allowed as business expenditure. The Ld. CIT(A), after detailed examination of the nature of contracts and business transactions, accepted the contention of the assessee and held that the foreign exchange fluctuation loss of Rs. 45.24 crores represented genuine business loss arising from hedging activities undert....
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....e bonus payment had actually been made before the due date of filing return under section 139(1) of the Act, deduction was allowable under section 43B of the Act. Although the Ld. CIT(A) admitted the additional ground for adjudication, the CIT(Appeals) did not allow the additional deduction of Rs. 23,60,531/- claimed under section 43B of the Act and no further relief was granted on this issue. 12. Both the Department and the assessee are in appeal against the order of CIT(Appeals). We shall first deal with the Department's appeal in ITA No. 288/Ahd/2026 (A.Y. 2013-14) 13. The Department has raised the following Grounds of Appeal: "1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in not accepting that Corporate Guarantee is an International Transaction u/s'928 of the Act, 1961 by ignoring the judgement of the CIT Vs. Everest Kanto Cylinder Ltd' (2015) 378 ITR 57 (Bom.), Hon'ble Bombay High court and Pr. cIT Vs' M/s'. Redington (India) Ltd. 430 ITR 298, Hon'ble Madras High Court?" 2. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) was justified in d....
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....ed to R&D, without appreciating the fact that these expenses were not even approved by DSIR? 9. Whether, given the facts and circumstances of the case and in accordance with the law, the ld.CIT(A) is justified in deleting the disallowance of claim of revenue expenditure of Rs,1,10,90,165/-, without appreciating the fact that expenses related to product registration are capital expenditure pertaining to regulatory approvals and material rights. 10. Whether, given the facts and circumstances of the case and in accordance with the law, the ld.CIT(A) is justified in deleting suo-moto disallowance made by the assessee and deleting the disallowance of administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules, restricting the disallowance u/s. 14A of the Act to the extent of exempt income of Rs. 5,208/-". 11. Whether, given the facts and circumstances of the case and in accordance with the law, the ld. CIT(A) is justified in deleting the addition of Rs. 78,626,505/- made to the book profit of the assessee, without appreciating the fact that the AO has correctly calculated the book profit as per the Explanation 1 clause (f) to section 115JB of the Act....
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....essment year 2010-11 decided on 03.03.2017 has already deleted the said corporate guarantee adjustment after concluding that the same is not an international transaction u/s. 92B of the Act. Learned Departmental Representative fails to indicate any distinction on facts or law in the impugned assessment year. We therefore adopt the very reasoning herein as well to delete the impugned corporate guarantee adjustment." 17. We further notice that the Tribunal in assessee's own case for Assessment Year 2010-11 had elaborately discussed the issue by relying upon various judicial precedents including Bharti Airtel Ltd. v. Addl. CIT [(2014) 43 taxmann.com 150 (Delhi Trib.)], Micro Ink Ltd. v. ACIT [(2016) 176 TTJ 8 (Ahd)] and Siro Clinpharm Pvt. Ltd. v. DCIT [(2016) 69 taxmann.com 336 (Mumbai Trib.)] and observed that: "A corporate guarantee issued by a parent company to support its subsidiary, without involving any cost, outflow or economic sacrifice, cannot be treated at par with a bank guarantee and therefore no arm's length guarantee commission can be imputed merely on assumptions." 18. The Tribunal further held that: "There is no material on record to indicate t....
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....strategic interest free advances made to its sister concerns." 24. The Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT [(2007) 288 ITR 1 (SC)] has held: "Once it is established that there was nexus between the expenditure and purpose of business, the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure." 25. Similarly, the Hon'ble Gujarat High Court in CIT v. Raghuvir Synthetics Ltd. [(2013) 354 ITR 222 (Guj)] held: "If there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest-free funds generated or available with the company." 26. In the present case, the Ld. CIT(A) has recorded finding that the advances were commercially expedient and intrinsically connected with business operations. The Assessing Officer has failed to establish any direct nexus between borrowed funds and the advances made. Respectfully following the binding precedents in assessee's own case as well as the judgments of the Hon'ble Supreme Court and Hon'....
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.... as well since there is no stipulation incorporated in the Act that the same would be allowable only to the extent of relevant figures stated in Form No.3CL." 32. The Tribunal further categorically observed that: "This is admittedly not the Revenue's case that the assessee has not incurred the impugned expenditure for the above specified purpose u/s 35(2AB) of the Act." 33. We further notice that the aforesaid decision of the Tribunal stood affirmed by the Hon'ble Gujarat High Court in Tax Appeal No.39 of 2015 in assessee's own case. The Hon'ble High Court, while considering allowability of weighted deduction in respect of scientific research expenditure incurred outside the approved in-house facility, following its earlier judgment in CIT v. Cadila Healthcare Ltd. reported in (2013) 31 taxmann.com 300 (Guj), held as under: "The Tribunal committed no error in holding that expenditure incurred outside the approved R&D facility would also qualify for weighted deduction under section 35(2AB), since the same was integrally connected with scientific research activity." 34. Similarly, in CIT v. Claris Lifesciences Ltd. reported in (2010) 326 ITR 251 (Guj), the ....
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.... and the expenditure is genuinely incurred for scientific research purposes, weighted deduction under section 35(2AB) of the Act cannot be curtailed merely because the quantum reflected in Form No.3CL differs from the claim made by the assessee. 38. Thus, the subsequent amendments enhancing the role of DSIR quantification and certification mechanism are prospective in operation and cannot be retrospectively applied to Assessment Year 2013-14 so as to unsettle the legal position prevailing during the relevant period. Consequently, the Revenue cannot derive support from the post-2016 amended framework for denying deduction in the year under consideration, which continues to be governed by the judicial precedents rendered under the unamended provisions applicable at the relevant point of time. 39. Respectfully following the binding decisions rendered in assessee's own case by the Coordinate Bench as well as the Hon'ble Gujarat High Court under the statutory provisions prevailing during the year under consideration, we find no infirmity in the order passed by the Ld. CIT(A) deleting disallowance of Rs. 2,34,58,952/- made under section 35(2AB) of the Act. 40. Accordingly, Groun....
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....ered by the judgment of the Hon'ble Gujarat High Court in assessee's own case in Tax Appeal No.39 of 2015, wherein the Hon'ble jurisdictional High Court upheld the findings of the Tribunal allowing product registration expenditure as revenue expenditure. 47. We also derive support from the judgment of the Hon'ble Gujarat High Court in CIT v. Torrent Pharmaceuticals Ltd. reported in (2013) 35 taxmann.com 300 (Guj), wherein the Hon'ble High Court held as under: "Expenditure incurred for obtaining registration of products in foreign countries cannot be treated as capital expenditure merely because such registration may incidentally benefit business in future years." 48. The Hon'ble jurisdictional High Court further observed: "The expenditure did not bring into existence any asset or advantage in capital field but merely facilitated carrying on of business operations." 49. We find force in the reasoning adopted in the aforesaid judicial precedents. In pharmaceutical industry, registration of products before drug regulatory authorities of various countries is a mandatory statutory requirement for marketing and export of medicines in those jurisdictions. Such a....
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....ind that identical issue has consistently been decided in favour of the assessee by the Coordinate Bench in earlier assessment years. The Coordinate Bench in assessee's own case for Assessment Year 2011-12 in ITA Nos.848 & 918/Ahd/2016, while adjudicating similar controversy, held as under: "Both the learned representatives inform us very fairly that a co-ordinate bench in assessment year 2007-08 has already restricted an identical disallowance to the extent of exempt income amount. We therefore follow the very course of action herein as well to restrict the impugned disallowance to Rs. 5,808/- only." 56. We further notice that similar view has also been taken by the Coordinate Bench in assessee's own case for Assessment Year 2012-13 in ITA Nos.345 & 383/Ahd/2020, wherein the Tribunal reiterated that disallowance under section 14A cannot exceed the exempt income actually earned during the relevant previous year. 57. The legal principle governing the issue is now no longer res integra. The Hon'ble Delhi High Court in Joint Investments Pvt. Ltd. v. CIT reported in (2015) 372 ITR 694 (Delhi) has categorically laid down the following proposition: "Section 14A or....
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....as the ratio laid down in Joint Investments Pvt. Ltd. v. CIT (supra), PCIT v. State Bank of Patiala (supra) and Cheminvest Ltd. v. CIT (supra), we uphold the order passed by the Ld. CIT(A). 64. Accordingly, Ground No.10 raised by the Revenue stands dismissed. 65. Ground No.11 relates to deletion of addition of Rs. 78,62,65,505/- made by the Assessing Officer while computing book profit under section 115JB of the Act in relation to disallowance made under section 14A read with Rule 8D of the Income-tax Rules. 66. During the course of assessment proceedings, the Assessing Officer made disallowance under section 14A of the Act under the normal provisions of the Act and thereafter added the same amount while computing book profit under section 115JB by invoking clause (f) of Explanation 1 to section 115JB(2). According to the Assessing Officer, expenditure relatable to exempt income was liable to be added back while computing MAT income also. 67. The Ld. CIT(A), however, deleted the aforesaid addition by following earlier orders passed in assessee's own case. We find that identical issue has already been decided in favour of the assessee by the Coordinate Bench in earlier a....
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....5,505/- made under section 115JB of the Act. 75. Accordingly, Ground No.11 raised by the Revenue stands dismissed. 76. Ground No.12 relates to deletion of disallowance of foreign exchange fluctuation loss amounting to Rs. 45,24,80,000/- which had been treated by the Assessing Officer as speculative loss under section 43(5) of the Act 77. During the course of assessment proceedings, the Assessing Officer observed that the assessee had incurred substantial loss on account of foreign exchange derivative/forward contracts entered into with banks. According to the Assessing Officer, such transactions were speculative in nature and therefore the resultant loss was liable to be treated as speculative loss under section 43(5) of the Act and not allowable as normal business loss. The Assessing Officer was of the view that the derivative contracts were independent transactions not directly linked with actual delivery of goods and therefore fell within the ambit of speculative transactions. 78. The Ld. CIT(A), however, deleted the disallowance by following earlier decisions rendered in assessee's own case. We find that identical controversy has already been examined in detail by t....
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....or whether they constituted hedging transactions undertaken to protect business exposure arising from export-import activities. We find that the assessee is engaged in substantial export-import business and had considerable foreign currency exposure during the year under consideration. The forward contracts and derivative instruments were entered into with banks only for the purpose of safeguarding against adverse fluctuation in foreign exchange rates affecting business receipts and payments. 84. The Revenue has not brought any material on record to establish that the impugned derivative contracts were entered into for speculative purposes disconnected from underlying business transactions. Mere absence of actual delivery in settlement of derivative contracts cannot by itself render such transactions speculative when they are demonstrably linked to business exposure and intended for risk mitigation. 85. In view of the settled legal position emerging from the judgments of the Hon'ble Gujarat High Court in CIT v. Friends & Friends Shipping Pvt. Ltd. (2013) 35 taxmann.com 553 (Guj), Full Bench decision in Pankaj Oil Mills v. CIT (1978) 115 ITR 824 (Guj)(FB) and the judgment of t....
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..../-) 4. The Hon'ble CIT(A) has erred in rejecting the appellant's additional claim for deduction of Rs. 23,60,531/- towards bonus u/s 43B, solely on the ground that such claim was not made in the original return, without appreciating that the liability had been fully paid during the year and eligible for deduction in accordance with law. (Additional Ground no. 4 in CIT Appeal) (Tax effect- Rs. 7,65,875/-) The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing." 89. Ground No.1 relates to disallowance of expenditure of Rs. 4,92,36,452/- incurred towards freebies, gifts, incentives and promotional items provided to doctors and medical practitioners, which has been disallowed under section 37(1) of the Act by invoking Explanation 1 thereto. 90. The Assessing Officer observed during the course of assessment proceedings that the assessee had incurred substantial expenditure towards distribution of gifts, sponsorships, hospitality, incentives and other promotional benefits to medical practitioners....
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....s is hit by Explanation 1 to section 37(1), the same cannot be allowed as business expenditure notwithstanding the fact that such expenditure may have been incurred for business promotion." 97. Respectfully following the binding decision of the Hon'ble Supreme Court in Apex Laboratories Pvt. Ltd. (supra) as well as the earlier decision rendered in assessee's own case, we uphold the order of the Ld. CIT(A) sustaining disallowance of Rs. 4,92,36,452/- under section 37(1) of the Act. 98. Accordingly, Ground No.1 raised by the assessee stands dismissed. 99. Ground No.2 relates to disallowance of Rs. 1,05,377/- under section 36(1)(va) read with section 2(24)(x) of the Act on account of delayed deposit of employees' contribution towards welfare funds. 100. During the course of assessment proceedings, the Assessing Officer observed that employees' contribution collected by the assessee towards Gujarat Labour Welfare Fund and Modi Benevolent Fund had not been deposited within the due dates prescribed under the respective welfare legislations governing such contributions. The Assessing Officer accordingly held that once employees' contribution is not deposited within the due dat....
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....ly deposit within the due date under the relevant enactment." 106. The Hon'ble Apex Court categorically concluded: "Parliament treated contributions under section 43B(b) differently from those under section 36(1)(va). Thus, it is evident that the employer's contribution is covered by section 43B while employees' contribution is governed by section 36(1)(va)." 107. Thus, the legal principle emerging from the aforesaid judgment is that employees' contribution collected by the employer assumes character of deemed income under section 2(24)(x) and deduction thereof is permissible only if the amount is deposited within the due date prescribed under the respective welfare legislation. Deposit made after the statutory due date cannot be allowed merely because payment was ultimately made before filing return under section 139(1) of the Act. 108. We are also unable to accept the argument of the assessee that the ratio of Checkmate Services Pvt. Ltd. (supra) should be confined only to PF/ESI contributions. The principle laid down by the Hon'ble Supreme Court is founded upon the statutory scheme of section 36(1)(va) and section 2(24)(x), which governs employees' contribution....
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....r section 35(2AB). However, the Ld. CIT(A) did not grant the additional claim. 116. Before us, the Ld. Counsel for the assessee submitted that once the expenditure incurred on scientific research activities has been accepted as genuine and eligible, weighted deduction under section 35(2AB) cannot be curtailed merely because certain contract research income was received by the assessee. It was argued that the deduction contemplated under section 35(2AB) is on gross eligible expenditure and not on net expenditure after reducing incidental receipts. 117. We find substantial force in the submissions advanced by the assessee. The issue now stands squarely covered in favour of the assessee by the Coordinate Bench decision in assessee's own case for Assessment Year 2011-12 in ITA Nos.848 & 918/Ahd/2016. The Tribunal while adjudicating identical controversy held as under: "It emerges that the assessee's endeavor before the DRP was to appraise it about DSIR's form 3CL instead of suo motu making the impugned disallowance. We notice in this factual backdrop that a co-ordinate bench in assessee's case itself ITA No.383/Ahd/2012 decided on 04.01.2017 follows tribunal&....
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.... section 43B of the Act in respect of bonus payment amounting to Rs. 23,60,531/- remained unclaimed while filing the return of income. The assessee contended that the impugned amount had actually been paid before the due date of filing return under section 139(1) of the Act and therefore deduction was allowable under section 43B of the Act on actual payment basis. However, the Ld. CIT(A) did not entertain the additional claim in absence of complete supporting evidences and detailed verification. 125. Before us, the Ld. Counsel for the assessee reiterated that the liability towards bonus had actually been discharged within the time prescribed under section 43B of the Act and therefore the deduction ought to be allowed. It was submitted that the omission in the computation of income was purely inadvertent and technical in nature. 126. We have carefully considered the rival submissions and perused the material available on record. We find that the controversy involved in the present ground is primarily factual in nature and revolves around verification of actual payment of bonus within the time contemplated under section 43B of the Act. 127. It is a settled principle of law t....